Claims Advisor Spring 2011 by Liquid Line, Inc.

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Information for todayâ&#x20AC;&#x2122;s claims professionals

Colossal Cleanup Regulators prepare to examine insurersâ&#x20AC;&#x2122; auto claims-handling software.

For Closing the Gap Get the Lead Out The Fine Points of Art Conservation Getting Ahead of Cannabusiness Liability Master Data Management change service requested

Take a Byte Out of Cyber Secrecy

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Contents in this issue spring 2011

The Fine Points of Artwork Claims A good conservator can tell what can be saved, what it will cost and what pre-loss conditions factor in to the damage assessment.

Cover Story

By Summer Street

Colossal Cleanup

Your claim file may be papered with things that could hurt your case later unless you know what is and isn’t discoverable.

Regulators prepare to examine insurers’ auto claims-handling software. By annmarie geddes lipold Claims advisor

The Conservation Center

For Closing the Gap Denials on mortgagee claims can nosedive in the cracks left by policy wording.

Claim Files That Blab

By rick hammond Johnson & Bell, Ltd.

By Gerard Harney and Peter Caltagirone Cozen O’Connor

Get the Lead Out Claims adjusters need to know and follow the updated EPA law on lead paint. By will southcombe Puroclean

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CLAIMS ADVISOR | SPRING 2011

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Contents

in this issue, contâ&#x20AC;&#x2122;d... spring 2011 32

Getting Ahead of Cannabusiness Liability

46 The Pearly Eight

You can avoid a fire and brimstone Some predict high times for the future audit experience by using these eight of medical marijuana businesses, but great best practices. is the insurance industry ready? By cindy hall, pmp By bevrlee j. lips claims advisor

Data Dump

aon esolutions

50 Feigning Spell

Know how to identify malingering as Using master data management, an insurer can turn a data junkyard into a mental health fraud. By Dr. David R. Price, PH.D. mechanized marvel. By Joshua Schwartz

PwC Diamond Advisory Services

42 Taking a Byte Out of Cyber Secrecy

The Forensic network

in every issue

54 Slash Loss Costs on Auto Glass Claims

Edit: Letter from the Editor

Pre-inspection protocols that verify Forensic technologists can help verify damage prior to repair or replacement of vehicle glass are reversing the or unwind intricate claims whose recent trend in illegitimate claims. details are bound up in cyber nooks By Peter Pearson and crannies. By Karl Epps

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CLAIMS ADVISOR | SPRING 2011

By Bevrlee J. Lips

edit letter from the editor

Spring Cleaning: Preparing for the Known and Unknown

It seems lately that every time I call my northern friends and colleagues, it is either snowing or about to snow. Winter weather has been punishing across the U.S. with a high point being January 11 when 49 states had snow—Florida being the exception. The good news is that technology has allowed insurance professionals to be connected to their companies and policyholders in a way not experienced before, even in the midst of blinding snowstorms. Being stuck at home today means firing up your computer and working remotely. Or if you’re stuck in transit at an airport or in traffic, your smartphone keeps you moving forward with your day. For policyholders, several insurers have developed apps for the iPhone, Android and Blackberry to take pictures and report claims from the scene of the accident rather than fumbling for phone numbers or sitting on hold. Added challenges brought on by not only new technology interaction but unexpected weather conditions, unplanned personal events, and unforeseen business circumstances can cause our intended path to be turned into a series of recalculations to get back on track—much like GPS instructions after a missed turn. That’s just life. The key is to have your proverbial house in order and build in checkpoints to prepare for those times when things get off-kilter. In reality, isn’t that the heart of our business? Winter is soon to be over and in my house that means one thing, spring cleaning. Your company may have sophisticated technology and workflows in place, but corporate spring cleaning is always a good idea. Examine customer feedback, get up to speed on new laws and regulations, review data management and clean up your claim files. You’ll want to question assumptions as well. What are they based on and does the logic still hold? I’m reminded of a quote from former Secretary of Defense Donald Rumsfeld about known knowns, known unknowns and unknown unknowns. There is a temptation to believe that the status quo is good enough, and expending money and man-hours to conduct a good cleaning in a down economy is not needed. The unknown unknowns are just fine. As coaching great Lou Holtz once said, “In the successful organization, no detail is too small to escape close attention.” Indeed he knew that the worst possible time to attempt examination and course correction is at crunch time. Spring is a great time to get things in order for the year ahead so you can deal with the knowns and the unknowns cost effectively.

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Information for today’s claims professionals

Spring 2011 VOLUME 5. NUMBER 1

Publisher & Editor Bevrlee J. Lips/editor@claimsadvisor.com Editorial Advisory Board Steven Carter

Expert Advantage

Glenn T. Gibson

Crawford & Company International

Patrick Harmon

IMACC

Patrick Jeremy

PowerGen Claims LLC

James R. Jones

Katie School of Insurance and Financial Services, Illinois State University

Robert Kelso Thomas W. Mallin John McHale Donna J. Popow

Kightlinger and Gray Property Loss Research Bureau Erie Insurance American Institute for CPCU/ Insurance Institute of America

Claims Advisor Staff Managing Editor/Maureen Latimer Contributing Writer/Annmarie Geddes Lipold VP Finance/Michael Marsh VP Information Technology/Michael Kay Web Site Associate/Chris Walters Project Associate/Amanda Pierce Warren Editorial Assistant/Paige Kay Database Associate/Sheila Hoyer Database Associate/Mandi Emery Design Assistant/Ashley Jones Design Assistant/Richard Shivers Human Resources/Shannon White Advertising Sales For advertising information, call 866.276.7970 x1357 or e-mail advertise@claimsadvisor.com.

Volume 5, Number 1, Claims Advisor (ISSN 1940-0993) is published four times a year in February, May, August and November by Claims Advisor, 186 Industrial Center Drive, Lake Helen, FL 32744. Printed in the U.S. Copyright ©2011 by Claims Advisor. All rights reserved. Reproduction in whole or in part without permission is strictly prohibited. No charge for subscriptions to qualified claims adjusters and professionals. Annual rate for subscriptions to nonqualified individuals is $46 USD. Canadian $70 (in U.S. funds). For individual issues, $12 USD. For reprints, e-mail the editor at editor@claimsadvisor.com. POSTMASTER: Send address changes to Claims Advisor, 186 Industrial Center Drive, Lake Helen, FL 32744.

Founder/D. Scott Plakon

Bevrlee J. Lips / Publisher & Editor editor@claimsadvisor.com

Claims Advisor

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contents | an art unto itself

The

Fine Point Artwork

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Above: A Czech vest, frozen for transport to the lab. Left: The same vest, cleaned and on display.

A good conservator can tell what can be saved, what it will cost and what pre-loss conditions factor in to the damage assessment.

ts Claims

Quick Look C Rescuing and restoring fine art can have more fine points than a Seurat. C Adjusters will need a team of specialists. C A high-quality conservator can save time and money, and serve as a trusted advisor to the insurer.

By Summer Street

In 2008, floods in the Midwest deluged Cedar Rapids, Iowa, submerging nine square miles of the city. The river swelled more than 32 feet and swamped the first floor exhibits of the National Czech

CLAIMS ADVISOR | SPRING 2011

contents | an art unto itself

and Slovak Museum and Library, where approximately a thousand traditional garments were found caked together in a large pile of putrid, black mud. Elsewhere in the city, the Veterans Memorial Museum suffered enough sewage contamination that work crews were not allowed inside for an additional week and a half after the event. By that time, there was active mold growth on the first floor, and the second floor’s stored collections were deteriorating under the humidity from standing water. In 2005, floodwaters from Hurricane Katrina washed over a famous English mid-1880s carved-wood sideboard that was awaiting shipment in a New Orleans warehouse. As a result, the animal glues that held the carved pieces together became ripe for mold, and the delicately incised details stood in danger of rotting away entirely. More recently, wildfires menaced Southern California, where flames licked at the perimeters of private homes containing collections of modern masters, such as Picasso, Calder, Warhol, Lichtenstein, Botero, and Matisse. Thanks, though, to a crew of art experts that was assembled to deal with the damage, the artwork in all of these venues was saved. Such a team of disaster response professionals is often composed of some combination of specialists: conservators from an art conservation laboratory; an independent adjuster who specializes in fine art losses; a certified fine art appraiser or specialty contents evaluation service; and a fine art transportation company. The appraiser or contents expert knows how damaged items should be prioritized based on value and historic significance, while the conservation laboratory has the professional knowledge and equipment to restore and repair them. The art handlers can safely move the pieces between the site and the lab, and the adjuster’s experience ensures the smooth navigation of an art claim’s unique concerns. Preparation and Triage at the Site Prior to the arrival of specialists, the insurer has to undertake various tasks, including scheduling transportation for the response team as well as readying the site for the team’s arrival. Each site requires different preparations, but

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This sideboard depicting the folk tale of Chevy Chase is one of the foremost examples of Victorian wood carving. Its historical value is impossible to discern, but its monetary value is in the six figures. The first picture shows how it was found by conservators; the second, after treatment.

A rescue team performs work on site before transportation to a conservation laboratory.

Mold growth requires extra precautions.

foremost among concerns are accessibility and security. Conservators require space to set up their equipment and examine and treat artwork, and they must be able to remove objects from the site. Moreover, the objects must remain secure and protected throughout the duration of the disaster recovery period. Sometimes special preparations are needed, such as obtaining appropriate permits and badges to access certain regions of a disaster zone. The credentials required for the specialists to work at the disaster site should be obtained before their arrival, thus ensuring their immediate access to the site and the damaged artwork. These preliminary duties frequently fall to the insurer, costs and all. In most scenarios, once the team’s work is underway, the art conservators will play a decisive role. Trained conservators can determine which items can

be saved and which are beyond repair. They can also identify the various levels of treatments possible, from minimal to complete, and explain the distinctions in appearance, stability and cost between the different options. A conservator also has the ability to assess what damage was the result of the disaster, elements of its pre-loss state, and what pre-loss conditions were exacerbated by the incident. A qualified conservator will of-

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contents | an art unto itself

The surface grime and water damage occurred during Hurricane Katrina, but the canvas tears were pre-existing. An oil painting of this quality can have huge ranges in value based on the artist, period of creation and many other factors. Oil paintings can be bought for several hundred to several millions of dollars.

An oxidized varnish can mask an intact paint layer. This painting by French artist Carriere and similar pieces have recently sold at auction for $11,000. Conservation treatment was $1,500.

fer different proposals to deal with the loss-related damages and to address the pre-loss condition. After the restoration is complete, the conservator is also in the best position to give advice on how to maintain the integrity of the piece. In some cases, such as with the California wildfires, a conservator can deem that the artwork is safest in situ and can create clean rooms within the building to treat the objects. Other times, there will be an immediate response on-site, with further treatment completed at the laboratory. Each decision is predicated on the condition, stability and material composition of the artwork involved. Even transportation and storage can be a deciding factor in the survival of damaged pieces, given that improper crating can create physical strain or deformations, temperature and

This Matisse, valued at over $60,000, was damaged due to poor packaging.

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humidity fluctuations can worsen conditions, and poor management can cause the loss of a piece entirely. All that said, even the most qualified experts are of limited use when they cannot respond promptly to the disaster. Companies and individuals that specialize in disaster response have the advantage here, as they will be equipped and prepared from the beginning. However, other factors must be taken into account with each claim. If an insurer has a preferred conservation company but it is located far from the new claim, a decision must be made for the sake of the artwork involved. Perhaps an experienced emergency mitigation contractor could manage the initial stages with conservator input until the professionals arrive on the scene. These decisions should not be made while the art suffers; a choice made in haste and out of need, rather than research, might not be the best option available for the artwork in the insurer’s care. Planning might seem like an overwhelming task, but even simple steps can diminish the damage and speed the recovery process. A comprehensive list of every piece of art in a residential or commercial collection—complete with location, description, size and value—will give the art team a blueprint to follow during the recovery and will minimize time wasted searching through debris. Knowledge of the collection also benefits the conservators in their corralling of supplies and people.

trained in one medium, such as paintings, and should not work outside their expertise. With this last rule, the value of hiring a conservation company that offers services in multiple disciplines becomes apparent. Perhaps the most important lesson regarding an art collection struck by disaster is not to dismiss any piece as a loss offhand without consulting a professional. When it seems that the destruction is total, the conservator may

identify the possibilities for renewal. In the case of the Iowa museum’s garments, the Katrina sideboard, and the California wildfire modern art, the damage that water and fire wreaked, training and perseverance restored. cA Summer Street is vice president for Business Development at The Conservation Center. Contributions were also made by Conservation Intern Kate Aguirre. www.theconservationcenter.com

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The Conservator’s Limited Role Any dependable conservator working in this country is a member of the governing body of their industry, the AIC (American Institute for Conservation), which upholds strict principles for the practice of ethical conservation. Core fundamentals include employing reversible treatments and adhering to the intent of the artist. A conservator’s goal is to stabilize the artwork while remaining as invisible as possible. In addition, there are other ethical tenets of the field: Conservators cannot perform appraisals on their own projects, as it constitutes a conflict of interest; pricing is based on the provision of service, not the estimated value of the piece; and conservators are specialists

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CLAIMS ADVISOR | SPRING 2011

LE G AL e y e | d is c o v e r y o v e r l o a d

Claim Files That Blab Your claim file may be papered with things that could hurt your case later unless you know what is and isnâ&#x20AC;&#x2122;t discoverable.

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Quick Look C Early findings in a claim investigation may be discoverable, so watch whom you hire to do the work. C Expert opinions can be protected if documented properly. C You can share claim information, but recipients should have a “need to know” if you don’t want the information going to your opponent.

By Gerard Harney and Peter Caltagirone

Imagine John Smith, a fresh hire in the subrogation department of Catastrophe Insurance Company. After reviewing one of the 1,000+ files referred to him by the property department, he finds what could be a proverbial “golden nugget.” The case involves a leak from a recently repaired water line on the top floor of a downtown office building. The independent adjuster previously hired by Catastrophe concluded in his final report that the potential for subrogation was “nil” because his plumbing expert determined that the leak was due to a hydraulic

hammer from water pressure problems throughout the building. But John knows an attorney who tells him of a case in the same building against this same plumbing contractor which resulted in a substantial verdict based upon evidence of the plumber’s negligent repairs. The attorney, however, cautions that the contractor often uses forms waiving subrogation rights. John dutifully prepares a detailed report to his supervisor summarizing the prior expert’s report and the advice received from his friend. Based upon this report, he is authorized to refer the

matter to the referenced attorney, who files suit. The first round of discovery from the defendant (the plumber) demands the entire contents of Catastrophe’s claim file. Do you see any problems here? The issue facing John is how he and his attorney can ethically protect what may prove to be prejudicial portions of the claim file. This dilemma arises primarily from two factors. First, an insurance company normally does an early investigation of the cause of damages to determine coverage and may not anticipate the use of its findings in litigation. Second, John and others at Catastrophe Insurance must

accurately report to their superiors on the claim’s early assessment so that a decision can be made regarding whether subrogation should be pursued. All of that is in the requested file. What Is Discoverable? In determining what portions of the claim file are discoverable, the first question a court considers is whether a particular report or other document is relevant. Most jurisdictions define relevancy as information that is not privileged and that might lead to the revelation of admissible evidence. This standard has been broadly interpreted to categorize as

CLAIMS ADVISOR | SPRING 2011

LE G AL E y e | d is c o v e r y o v e r l o a d

relevant any information which â&#x20AC;&#x153;might reasonably assist a party in evaluating the case, preparing for trial, or facilitating settlement,â&#x20AC;? as in Lipton v. Sup. Ct. [emphasis in original]. Since just about anything can be viewed as assisting in trial preparation or evaluating the case for settlement purposes, it is relatively clear that the battle usually comes down to whether a portion of the claim file is privileged. There are two areas of privilege that may apply to the claim file in this case: attorney-client communications and work product. They are the usual battlegrounds when it comes to what may be protected. Attorney-Client Privilege In order for an attorney-client communication to be privileged, it must be confidential in nature (i.e., between an attorney and the client) and concern litigation or potential litigation. Here, John Smithâ&#x20AC;&#x2122;s conversation with his lawyer friend occurred before the decision was made to subrogate and before the lawyer was actually retained. Fortunately, the privilege has been extended to communications between an insurer and its attorneys before and after the attorney is retained, as long as they relate to potential legal matters. (See Houston General Ins. Co. v. Sup. Ct.) Therefore, Johnâ&#x20AC;&#x2122;s initial discussions with the attorney as documented in the claim file

would be protected from discovery. As a practice point, the adjuster should document in the claim file that the source of the information was part of an initial or subsequent attorney-client conference. What about Johnâ&#x20AC;&#x2122;s later report to his supervisor outlining the potential case against the plumber and its drawbacks as related to him by the attorney? Confidentiality is lost if the communication is revealed to a third party. Fortunately, this does not extend to Johnâ&#x20AC;&#x2122;s supervisor in this case. The key concept is who has the â&#x20AC;&#x153;need to know.â&#x20AC;? When legal advice is communicated to other company personnel whose involvement is necessary to reach a decision, the privilege remains intact. In the 2007 Zurich American Ins. Co. v. Sup. Ct. case, a discovery referee ordered the production of all correspondence from counsel within the claim file that had been passed on to other company personnel. The appellate court reversed, concluding that the â&#x20AC;&#x153;need to knowâ&#x20AC;? standard determined how the privilege would be enforced. That is not to say that the claim handlerâ&#x20AC;&#x2122;s own opinions regarding various legal issues involved in the case or the settlement value of the case are protected from disclosure. Nor can the independent adjusterâ&#x20AC;&#x2122;s prior advice that the potential for subrogation was â&#x20AC;&#x153;nilâ&#x20AC;? likely be withheld. But Johnâ&#x20AC;&#x2122;s case evaluation would be protected if it was

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clear from the claim file (if not expressly stated) that it was based upon advice from his attorney. Work Product Doctrine So the plumber is unlikely to get the portions of the claim file representing the attorneyâ&#x20AC;&#x2122;s confidential communications with John or his superiors. This privilege, however, may not extend to factual information obtained by the adjuster or attorney, such as expert reports or other potentially relevant documents. What about the prior expertâ&#x20AC;&#x2122;s report and the statement from the insured obtained by the adjuster and provided to the attorney? The work product doctrine protects the results of work performed by an attorney so that those findings may not be unfairly utilized by an adversary. Some jurisdictions extend the privilege to non-attorneys working in contemplation of litigation (see Nacht v. Sup. Ct., 1996). However, other jurisdictions strictly scrutinize privilege and require a specific decision by the insurer to pursue subrogation before it applies (see Weber v. Paduano, 2003). The investigation of claims is part of the ordinary business of insurance companies, but at a definable moment, the focus of the investigation â&#x20AC;&#x153;shifts from the ordinary course of business to anticipation of litigation,â&#x20AC;? according to the decision in Fine v. Bellefonte Underwriters Ins. If the court can discern that shift, it will draw the line there between discoverable materials and work product. The mere fact that counsel is hired and even had a hand in preparing certain materials in claims files (including expert reports) is not dispositive of where that line is drawn, according to the Fine court. Rather, as stated by the Weber court, â&#x20AC;&#x153;An insurer does not have an identifiable resolve to litigate until it has made a decision regarding subrogationâ&#x20AC;Ś[and] documents created as part of this process would have been created in the same form regardless of the insurerâ&#x20AC;&#x2122;s eventual decision as to litigation.â&#x20AC;? In a 2010 California case, Coito v. Sup. Ct. (on review), the court chose to part company with the Nacht appellate courtâ&#x20AC;&#x2122;s protection of witness statements, which had been followed for 16 years.

Coito held that written and recorded witness statements, including not only those produced by the witness and turned over to counsel but also those taken by counsel, were not attorney work product. The court explained that, since witness statements can be admitted at trial, these statements should be discoverable because, otherwise, the party denied access will “have had no opportunity to prepare for their use.” Therefore, the trend in claim file discovery appears to be to make discoverable those expert reports that were prepared before litigation was contemplated, as well as witness statements, whether taken by an attorney or adjuster even in anticipation of potential litigation. You have a better chance of protecting an expert report if the expert is initially retained by counsel as a consultant, particularly in view of the change in Federal Rule 26 providing some protection to drafts of expert reports. In the above hypothetical case, initial expert reports are likely to be unprotected since they are part of the insurance company’s usual practice of determining the cause of the loss. The statements obtained by the first adjuster would also be discoverable, particularly in light of his conclusion that subrogation was “nil” or unlikely.

Gerard Harney and Peter Caltagirone practice in the Subrogation and Recovery Department at Cozen O’Connor’s California and Philadelphia offices, respectively. http://subrogationandrecoverylawblog.com

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Keep Files Lean and Clean Too much information in the claim file may not always be a good thing. Consider whether a statement from an insured, in particular, is really necessary. Do you need a report from an expert consultant who may not have all the facts? Avoid negative comments regarding subrogation potential, and, when you are relying upon the advice from counsel, make it clear that you are doing so. cA

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CLAIMS ADVISOR | SPRING 2011

feature | sullied software

Colossal Cleanup Regulators prepare to examine insurersâ&#x20AC;&#x2122; auto claims-handling software.

Quick Look C Denials of auto injury claims led to vigorous complaints and, finally, a probe. C Regulators want to know if mishandling of Colossal software is widespread. By Annmarie Geddes Lipold

The use of software to process auto claims is coming under broader and closer scrutiny from insurance regulators. And thanks to a $10 million settlement with Allstate, insurance regulatory staffs will be better trained to see that insurers use claims-settling software appropriately. The Allstate settlement is the result of the National Association of Insurance Commissioners’ (NAIC) first multi-state market conduct examination of a national personal lines insurer due to its software use for claims handling. As one of the nation’s top private passenger auto insurers, the Chicagobased, Fortune 100 carrier operates in 38 states, has $133 billion in total assets and is rated A+ by the A.M. Best Company. Allstate has until April 4, 2011, to adopt specific claims practices and procedures outlined in the settlement, according to the New York Insurance Department, which led the NAIC study along with the Florida, Illinois and Iowa insurance departments. Additionally, Allstate must demonstrate the appropriate use of its auto claims software, Colossus. As a result of the investigation, regulators concluded that the insurance industry’s

use of claims-handling software can provide “significant benefits to the public in increased objectivity and efficiency” but that such use can also “present special regulatory monitoring issues.” Hence, the $10 million fund to help regulators spot insurers inappropriately applying software to settle claims. “The hope is that there will be heightened scrutiny of programs to make sure claims are handled properly and consumer interests are protected,” said Steven Nachman, deputy superintendent for frauds and consumer services for New York state’s Insurance Department. The department has already begun preliminary examinations of other auto insurance companies that operate there, Nachman said. New York has about 250 such carriers. “We now have sufficient expertise and knowledge that we can [examine],” he said. “We do want to use the [Allstate] settlement as a template for further investigation of property casualty insurers’ use of these programs and potentially secure agreements along the same lines,” he added. Other regulators are following suit. “Insurers should be aware that we are watching for these types of issues,” said Steve Parton, general

counsel for the Florida Office of Insurance Regulation. Allstate Under the Microscope In 2009, regulators began looking at Allstate’s use of Colossus to determine settlements for private auto passenger liability claims. Developed by Computer Sciences Corp. (CSC), Colossus is a rules-based program with about 600 injury profiles that help adjusters determine damages for bodily injury claims. “Colossus is a bodily injury evaluation tool that can help increase consistency and reduce subjectivity in the claims evaluation process,” said Ed Charlton, a vice president in CSC’s Property & Casualty Insurance Division. The software is used by nearly 25% of the top 100 insurers in the United States. Adjusters enter detailed medical information into Colossus, which identifies inconsistencies regarding injuries, treatment, results and prognosis. Using a methodology that assigns trauma severity points to injuries, the program calcu-

C A settlement with Allstate gives some clues as to what the states want from insurers.

lates a monetary value range for damages based on dollar values assigned by the insurer for each severity point. The software does not assess or revise special damages, liability issues or offsets. The Consumer Federation of America has come out with its own complaint that Colossus and similar software fail to estimate damages such as past or future bills related to the insured event or losses of or reductions in wages resulting from the injury. Colossus is occasionally “tuned” or updated by insurers so the monetary value connected to trauma severity reflects recent settlement data for similar claims. Regulators found Allstate did not properly tune Colossus consistently among regions, Nachman said. Other insurers may be having the same problems. Besides paying $10 million for insurance department training, Allstate must meet several requirements regarding its tuning process, audits, claims manuals, how

“ We do want to use the [Allstate] settlement as a template for further investigation of property casualty insurers’ use of these programs and potentially secure agreements along the

CLAIMS ADVISOR | SPRING 2011

feature | sullied software

Key Allstate Settlement Requirements The Allstate settlement agreement provides guidelines for using software programs, such as Colossus, for claims adjusting. According to the agreement, “proper and appropriate practices” include: • Notifying claimants that Colossus might be used to adjust bodily injury claims. • Consolidating claims practices in a single “casualty claims practice manual” and ensuring it is available electronically to all claims personnel. • Establishing a policy to not require claims personnel to settle claims based solely on Colossus recommendations. • Establishing a policy to disallow incentives that would encourage claims personnel to settle claims above or below Colossus values. • Documenting reasons for not adopting a Colossus update. • Having adjusters who use Colossus rely on an Allstate-prescribed evaluation range for negotiating bodily injury claims. • Establishing a separate tuning process that shows the relationship between impairment ratings and regular trauma. • Sampling claims to confirm they were properly evaluated. • Tuning analysis with specific sampling and management oversight practices every 12 to 18 months to ensure Colossus recommendations reflect current regional values. The goal is to meet a payment rate as close to 1.00 as possible with no more than 50% of closed claims above the Colossus recommendation. For instance, Allstate’s claims-tuning audit must include all closed claims processed with Colossus except claims: • That show a “zero” loss payment • In which the loss payment is less than or equal to special damages • That show presence of comparative negligence • That contain a contribution • In which the disfigurement amount is greater than or equal to $5,000 or disfigurement is 50% or more of Colossus’s general damages recommendation • In which the loss payment amount equals or exceeds the policy limit. The settlement also requires Computer Sciences Corporation, which developed Colossus, to make adjustments to the tuning curve, if necessary. These tuning recommendations should be as close to a payment rate of 1.0 as possible with no more than 50% of loss payments above the retuned Colossus recommendations. A scatter graph and tiered analysis of closed claim data must be provided.

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adjusters are to properly use Colossus, and the role of regional managers in tuning Colossus. Allstate was given 180 days to comply with the settlement’s requirements. For the next five years, the insurer will be examined annually by the lead regulators to assure compliance. The settlement is in effect until Dec. 31, 2015. “[The examination] did not find convincing evidence that the insurer was using Colossus to systematically lowball claims,” said Robert Hartwig, president of the Insurance Information Institute. Nachman of New York said the settlement does, however, necessitate better management oversight of how Allstate uses the software. The settlement clarifies that Allstate does not admit, deny or concede fault, wrongdoing or liability relating to the facts or allegations in its practices, “but considers it desirable that the matter be resolved.” Allstate declined invitations to interview with Claims Advisor on how it is implementing the settlement requirements, but an October 2010 news release from the insurer stated it “cooperated fully with the examination” and was “pleased” that regulators found no “institutional issues” of claims underpayment. Under the Microscope Regulators decided to investigate Allstate due to what Nachman said was a “cottage industry” of lawsuits and accusations by claimants and trial attorneys that Colossus was ultimately being misused by Allstate to deny claims or lower claims settlement amounts. “The issue was instigated by a small

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feature | sullied software

Potential Response from Consumers The Consumer Federation of America is recommending that insurance consumers follow some guidelines to protect themselves from unjustifiably low claims offers. Here are some of their recommendations: • • • •

Determine if the offer is generated by a computerized software program, such as Colossus or similar systems. Ask to see the high and low offers the methodology generated before the adjuster made your offer of settlement. Don’t accept any offer that falls below the high end of the range. If the insurer refuses to provide compensation from that high end, look to the state insurance commission or consider the services of an attorney.

Source: Consumer Federation of America, www.consumerfed.org/pdfs/Claims_Consumer_Alert_12-8.pdf

group of consumer advocates,” Hartwig said. Parton said the Florida Office of Insurance Regulation was concerned Allstate might be “manipulating Colossus” in an attempt to avoid paying claims. The thought was, if the company were doing it in Florida, it could be doing it in other states, he said. “Obviously, any time there is a suggestion that an insurer may be manipulating claims, we are

concerned,” Parton said. “Allstate had historically been reluctant to discuss Colossus and reveal details of its claims process changes in the 1990s, which they did with McKinsey & Co.,” Nachman said. “They had incurred fines for refusal to turn over records.” In 2008, Allstate began to reverse course and posted 150,000 records online to show they had nothing to hide, he added. The regulators’ ex-

“ The hope is that there will be heightened scrutiny of programs to make sure claims are handled properly and consumer interests are protected.”

amination comprehensively reviewed Allstate’s bodily injury claims practices from the mid-1990s to the present. Allstate turned over electronic data and claims information for nearly 2 million separate bodily injury claims. Examiners reviewed more than 1 million pages of documents—including claims manuals, training materials, complaint data, claims related to market conduct exams and company records. “Insurers have every right to attempt to bring consistency and uniformity to their claims management processes and oversight,” Nachman said. But Allstate needed a process for better internal control. Regulators wanted to make sure Colossus was a guide and not a “controlling factor” in claims settlements. Another concern was that claims denials and settlement amounts were inconsistent on a regional basis. Allstate’s regional managers, Nachman said, had too much

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discretion to “tune” and “retune” the software to reflect recently resolved claims. As a result, some entered unnecessary data while important data, such as jury verdicts, were omitted. These kinds of errors and inconsistencies could be widespread, regulators fear. Adding to the oversight problem has been the complexity of the software system. The money set aside from the Allstate settlement should help regulators get and stay up to speed on some of the more prevalent systems and undertake a broader and more detailed review of auto insurers nationwide. “Regulators would be remiss if they did not pay attention to that (piece) of the process,” the I.I.I.’s Hartwig said. “They have to keep up with the way insurance is being done.” cA Annmarie Geddes Lipold is a contributing writer to Claims Advisor.

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legal eye | mumâ&#x20AC;&#x2122;s the word

Denials on mortgagee claims can nosedive in the cracks left by policy wording.

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For Clo the G

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Quick Look

By Rick Hammond

A lender, or mortgagee, is bestowed with certain rights under a homeowners insurance policy by virtue of the wording in the insurance contract. But questions relating to the rights and obligations of mortgagees under the mortgage clause have arisen, especially as the foreclosure crisis has become a chronic condition. What’s come to light is the imprecise wording of most homeowners policies with regard to lenders. A handful of claims have resulted in lawsuits that give some guidance as to how the courts see matters. Foreclosure Notifications When a notice of foreclosure is issued by a mortgagee, many insurers don’t learn about it until after the property is destroyed by fire. Why? Most property policies state that a lender is required to notify the insurer of any change in ownership, occupancy, a substantial change in risk or an increase in hazard of which the mortgagee is aware.

The problem lies in the clarity of policy wording. Courts have reached differing opinions regarding whether a foreclosure amounts to an increase in hazard or risk and have generally based their decisions on whether or not the insurance policy at issue was clear regarding the mortgage company’s obligations. For example, in U.S. Bank v. Tennessee Farmers Mutual Insurance Co., an insured fell behind on her monthly mortgage payments, and the mortgagee, U.S. Bank, initiated foreclosure. The bank sent a letter to the homeowner stating that it had initiated a foreclosure, but it failed to notify the insurer that a notice of foreclosure was issued. Before the foreclosure process was completed, the homeowner and her husband filed for bankruptcy, which stayed the foreclosure proceedings. Shortly thereafter, the house was destroyed by a fire. U.S. Bank sought coverage from Tennessee Farmers for the fire loss, but the

insurer denied the claim, saying the bank’s failure to provide notice of foreclosure was a breach of the policy’s mortgage clause. The clause stated that Tennessee Farmers would “protect the mortgagee’s interest in the insured building. This protection will not be invalidated by any…increase in hazard, change of ownership, or foreclosure if the mortgagee has no knowledge of these conditions [emphasis added].” The case eventually found its way to the Tennessee Supreme Court, which held that the bank’s commencement of foreclosure proceedings was not an increase in hazard requiring notification to the insurance company. The court offered the following as part of its reasoning: …we decline to read into this policy an obligation to notify the insurer of the commencement of foreclosure. In our view, the insurer is essentially asking us to write a new contract for the parties in accordance with its idea of

osing Gap

C Lenders often apply only the benefits of the homeowners policy to themselves. C Insurers want mortgagees to be held to policy standards prescribed for the insured. C Courts frequently reverse claims denials when policy language is ambiguous.

what the policy should have said [emphasis added]. This we decline to do, as our duty is to construe and enforce the policy as written, not make a new contract for the parties on different terms. In other words, in order for the court to find in favor of the insurer on this issue, the policy must specifically require the disclosure of any foreclosure proceedings as a precondition to coverage. Note, however, that the court’s reasoning may provide an argument that notice of an increase in hazard is required if, during foreclosure pro-

CLAIMS ADVISOR | SPRING 2011

legal Eye | mum’s the word

ceedings, the mortgagee finds red flags that indicate that the mortgage loan it made was the result of fraud on the borrower’s part. Does Rescission Nullify Mortgagee Coverage? The mortgage clause contained in most property policies does not address the impact of rescission on a mortgagee. Theoretically, a rescission would wipe away the entire policy, and the insurer wouldn’t owe any contractual duties to anyone—not the insured or the mortgagee. It would be as if the policy never existed. However, the issue has not been unanimously resolved by the various states. In Fayetteville Building & Loan Ass’n. v. Mutual Fire Ins. Co. of West Virginia, the court refused to bar the mortgagee’s insurance claim on a damaged property even though the mortgagor’s application for insurance contained fraudulent representations about its geographical location and proximity to a fire hydrant. The insurer argued that the material misrepresentations voided the policy from its inception and, therefore, the mortgagee should have no rights under the policy. The court rejected the insurer’s arguments and held that it had to show evidence that the mortgagee had prior 26

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knowledge of the fraud. The court quoted the reasoning in Germania Fire Insurance Co. v. Bally as support for its conclusion. As is well known, many insurance policies are issued, primarily, to protect mortgagees. In fact, it is made a condition of the mortgage, as in this case, that the insurance shall be carried by the owner of the property to protect the interests of the mortgagee. This exaction by the mortgagee is well known to the insurance companies, and they are only too glad to take the risk. The insurer issues the policy to the mortgagor. It is a contract between the mortgagor and the insurance company. The mortgagee is not interested in the contract in its inception, and only becomes interested after its execution, when the mortgage clause is attached to the policy for his protection. We think the mortgagee, when a policy is presented to him with a standard mortgage clause attached thereto in his favor, is justified in assuming that the insurance company has satisfied itself that the policy is valid and free from impeachment for any conduct or act of the

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assured at its inception or prior to the attachment of the mortgage clause. Conversely, the court in Young Men’s Lyceum v. National Ben Franklin Fire Insurance Co. reached the opposite conclusion. In that case, the policy contained a warranty that the insured property was located within 500 feet of a fire hydrant, and the accuracy of the warranty was a condition precedent to coverage. Again, the issue was whether the insured’s false statement voided coverage for the mortgagee. The court held that it did, in fact, void the mortgagee’s coverage. The court reasoned that, if the insured makes a false representation regarding a material fact that affects the risk and that would affect the insurer’s decision to issue the policy or the premium it charges, that false statement could be the basis for rescinding the policy as to both the insured and the mortgagee. In light of the conflicting opinions regarding the insurer’s right to rescind coverage to a mortgagee when the insured commits fraud in the application for insurance, it would seem advisable for insurers to clarify their rights regarding this issue in their policies of insurance and within the related mortgage

clause. Otherwise, claims outcomes are at the discretion of the court. Mortgagee Deadlines for Filing Claims and Lawsuits Another area of dispute is the time period for filing suit by a mortgagee. In Howe v. Mill Owners’ Mutual Fire Ins. Co. of Iowa, the insurer sought to dismiss the mortgagee’s lawsuit because of its failure to file suit within the contractual limitations period. The policy in that case stated, “No suit or action on this policy, for the recovery of any claim, shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, nor unless commenced within twelve months.” The court upheld the insurer’s claim because it found the policy to be clear and unambiguous as well as broad in scope as far as the rights of the plaintiff-mortgagee were concerned. Therefore, the court denied the mortgagee’s claim because of its failure to bring suit within the contract period. However, in a more recent case, U.S. of America (Small Business Administration), the Vermont National Bank, Plaintiffs v. Commercial Union Ins. Companies, Vermont National, as a mortgagee, filed suit against Commer-

cial Union seeking coverage for loss to its collateral. The insurer filed an affirmative defense based upon its policy provision that stated, “No suit shall be brought on this policy unless the insured has complied with all policy provisions and has commenced the suit within one year after the loss occurs.” The trial court construed the policy in favor of the insurer, but the mortgagee appealed. The appellate court found that a standard mortgage clause is intended to protect the interests of a mortgagee from any acts or omissions amounting to a default by the insured. Citing Satchell v. Insurance Placement Facility of Pennsylvania, the Vermont court ruled that the mortgage clause operates as a separate contract between the mortgagee and the insurer; i.e., “The indemnity of the

mortgagee is not placed at the whim of his debtor, and is subject only to breaches of which the mortgagee is, himself, guilty…and gives the mortgagee an insured interest that the insured does not have.” Therefore, the question that controls this case is whether the contract terms reasonably informed the mortgagee that the one-year period that bound the insured also bound the mortgagee. As stated in the policy wording, the time limitation in Commercial Union’s policy imposed its one-year restriction on “the insured.” Therefore, the court reversed the trial court’s ruling and found in favor of the mortgagee: It is a fundamental rule that a policy of insurance must be construed liberally in respect to the person insured and strictly

with respect to the insurer. Stonewall Ins. Co., 130 Vt. at 566, 298 A.2d 826 (quoting Valente v. Commercial Ins. Co., 126 Vt. 455, 459, 236 A.2d 241 (1967)). “‘We believe the general rule, that conditions in insurance policies inserted for the benefit of the company should be strictly construed against it, to be a sound one.’” Mosley v. Vermont Mutual Fire Ins. Co., 55 Vt. 142, 147 (1883) (quoting Turner v. Meriden Fire Ins. Co., 16 F. 454, 458 (D.R.I.1883)). In the cases that have been discussed, the essential element in the courts’ rulings on mortgagee rights and obligations vis-à-vis an insurer is whether the policy of insurance is clear and unambiguous on the matter

involved in the claim. For three essential elements— foreclosure notifications, rescissions and filing deadlines—imprecise language has led to the reversal of claim denials. As a point of advocacy, the claims units at insurance companies might be well served by taking control of the “bus,” or at least providing the driver some navigational assistance. Mortgagee claims don’t have to be such a bumpy ride, and they certainly don’t have to end in a legal morass. It just takes closing the policy language gap. cA Rick Hammond (hammondr@jbltd.com) is a shareholder with Chicago-based lawfirm Johnson & Bell, Ltd., He can be reached at (312) 984-3425 or visit www. InsuranceFraudLaw.com.

CLAIMS ADVISOR | SPRING 2011

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Get the 28

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Quick Look C Updated EPA rules on lead paint affect all homes, schools and child-care centers built before 1978.

Claims adjusters need to know and follow the updated EPA law on lead paint.

C Nearly 80% of all U.S. residential dwellings are affected. C Contractor certification isn’t a given. Check your preferred referral list for qualifications.

By Will Southcombe

In April 2010, the Environmental Protection Agency (EPA) issued the Renovation, Repair and Painting Rules (RRP) requiring the use of lead-safe practices during home renovation, repair and painting projects to prevent lead poisoning and lead toxicity. Under the new rule, contractors performing projects that disturb lead-based paint in homes, child-care facilities, and schools built before 1978 must be certified and follow specific work practices to prevent lead contamination. This rule affects approximately 69 million homes in the United States—nearly 80% of all residential dwellings. Many states are being approved by the EPA to take over the full administration of this program and are establishing additional lead paint regulations and rules. It is critical to keep track of both federal and state requirements. Claims departments should maintain a list of contractors

that are lead-certified by the EPA and be ready to recommend a qualified contractor to policyholders. Keep in mind, contractors that take the time to have their workers certified may be more expensive than those that don’t, which could affect the cost of repairs. On the other hand, the upfront expenditure on quality could eliminate secondary costs resulting from contamination. Understanding the Law Contractors are obliged to take three simple steps when dealing with lead paint exposures: Contain the work area; minimize and limit the spread of dust; and thoroughly clean up the area. The new rules do have exceptions. The regulations generally do not apply to maintenance projects in which less than six square feet of lead-based paint is disturbed in a room or less than 20 square feet of lead-based paint is disturbed on the exterior, but this does not include

window replacement, demolition or prohibited practices. (Note: The EPA RRP rules are not aligned with certain other federal agencies. When working in HUD property (any property that receives federal subsidies), it is important to be aware of the appropriate HUD regulations.) Originally, homeowners could opt out of having their contractors follow leadsafe work practices in their homes if they met certain requirements. However, the opt-out option was quashed in June 2010 to better enforce the purpose of the RRP regulations to prevent lead paint poisoning. In addition, many states are being approved by the EPA to take over the RRP program and are enacting their own lead paint rules and policies. (To see states and their status, go to http://www. healthyhomestraining.org/ rrp/State.htm, or http://www. epa.gov/lead/new.htm.) The first and most important step

for insurance adjusters is to get educated. At this writing, 12 states have individual programs and others are in the filing stages. Reviewing the Claim Some steps that all claims adjusters should follow for each and every claim include: Testing for lead-based paint. There are two approaches to testing: 1. Test all paint. Using this approach, the restoration professional tests all layers of paint—the top coat and all layers below that. The current owner may not even be aware of those layers. Whenever there is any doubt, the restoration professional must make a “presumed lead” declaration and proceed accordingly. Only if all of the tests come back clearly negative would

Lead Out

CLAIMS ADVISOR | SPRING 2011

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the restoration professional conclude there is no lead-based paint in the area. Whenever the restoration professional makes a negative finding, the adjuster should request a copy of all testing data to verify the results, including photos of the test results. 2. Assume there is leadbased paint in the work area. Many professional restoration companies are adopting that position for all homes built before 1978. This assumption provides the greatest degree of safety and eliminates the possibility of their work (even unknowingly) generating lead contamination to the indoor environment. â&#x20AC;˘ Educating the policyholder about lead hazards. Many

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property owners are completely unaware that their homes could be contaminated with lead-based paint and have no knowledge of the potential dangers. The claims adjuster should be prepared to educate the policyholder on the dangers of such a situation, should it exist. Lead-based paint contamination can occur any time the painted surface is disturbed (cut, torn, sanded, repaired, etc.). Those disruptions can result from a number of disasters, including fire, wind, water and smoke. The restoration professional is required to provide a specific EPA pamphlet to every property owner and occupant of property built before 1978. This pamphlet is

required regardless of any test results. There is also a specific EPA form that the restoration professional is required to use to confirm delivery of the pamphlet. The claims adjuster should confirm that the pamphlet is provided when appropriate. â&#x20AC;˘ Making sure proper procedures are followed in order to provide an accurate estimate. Claims adjusters are responsible for providing an accurate estimate through the examination of the damages and for approving the cost of restoration. If proper procedures are not followed by the restoration professional, it can dramatically affect the total cost of the restoration/repair. Often, the use of a lead-paint qualified, certified contractor is central to cost savings because secondary problems and supplemental claims are avoided. Finding the Right Partner The first step should be to contact a reliable restoration company with proof of proper certification on lead-based paint rules. Some companies require that all of their contractors be lead paint certified. For each and every restoration project, certified contractors should provide a copy of their EPA or state lead certification and give details of the lead-safe methods they will use to perform the job. Not only do renovators need to be lead certified, so do inspectors, designers, supervisors, lead abatement contractors, and sampling and risk assessment firms. If

you use independent adjusters, they should be savvy on lead-based paint requirements and certified firms. The EPA offers a national locator for renovation, repair and painting firms that they have certified (http://cfpub. epa.gov/flpp/searchrrp_firm. htm), but authorized states that administer their own programs may also provide a locator service. Several states provide online databases or listings through their health department websites. Lead certifications do expire, so check with the EPA or state department of health to make sure all certifications are current. Naturally, all providers should carry appropriate insurance, and abatement contractors should cover costs associated with failing a clearance test at the end of their work. Having a standard contract and checklist for such work could help ensure that all claims dealing with lead-based paint work go smoothly. Check the EPA website and your state health department for a boilerplate that might help. cA Will Southcombe, BA, MA, MBM, CMR, WRT, ASD, is the director of Training & Technical Services for PuroCleanâ&#x20AC;&#x2122;s North American headquarters. wsouthcombe@puroclean.com

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Getti of

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ing Ahead

Cannabusiness Liability Some predict high times for the future of medical marijuana businesses, but is the insurance industry ready? By Bevrlee J. Lips

The medical use of marijuana is legal in 15 states and the District of Columbia, and 17 more states have legalization legislation or ballot measures in the pipeline. Just the mention of marijuana conjures up images of Cheech and Chong, drooping eyelids, black lights, glow posters, and a smoky haze. But the medical marijuana industry is something quite different. The burgeoning industry deals with the serious issue of pain management for very ill patients, and the continuing rise in public support for the legalization of marijuana for medical use has created a market segment with big implications for the insurance industry. One of the biggest and

most obvious challenges for the industry is standards. Sketchy state regulations, a confusing message from the federal government and other gaping holes in how the legalization laws are worded provide a plethora of problems for insurers and, ultimately, for claims. The one constant is that doctors cannot prescribe a nonFDA approved substance; however, in medical excuse marijuana states only, they can recommend it. From there it gets complicated. Under President George W. Bush, marijuana dispensaries operating on the “edge” of the law were raided regularly. However, the Obama administration vowed to end raids on dispensaries taking a more

hands-off approach, and Attorney General Holder has stated that he will not prosecute medical marijuana users. Still, those in the business tread lightly, unsure of what is and is not worthy of the government’s attention. Laws Vary Each state has its own set of rules and regulations for medical marijuana growth, eligibility allowances, and use by patients, and they often vary city-by-city or county-by-county. The state-run program in Michigan allows patients diagnosed with

Quick Look C Cannabis is an up-and-coming business with real property-casualty needs. C Only a few insurers are active in the niche, but they are setting the standards. C Potential claims run from theft and crop damage to packaging and product liability.

specific medical conditions to cultivate and use marijuana. The eligible conditions include cancer, AIDS, hepatitis C, Crohn’s disease, Alzheimer’s and multiple sclerosis. Others diseases or conditions are eligible at the discretion of the Department of Community Health. Washington, D.C.’s program is administered by the mayor and Department of Health—they have not yet determined program details. The legislation approves patients diagnosed with cancer, AIDS, multiple sclerosis,

CLAIMS ADVISOR | SPRING 2011

f e a t u r e | S m o k e o n t h e h o ri z o n

glaucoma, and other chronic conditions that impede the basic functions of life. Colorado has a different scenario altogether. “Colorado has an amendment to the constitution [Amendment 20], where in the other states it’s just a law,” says Robert Morrissey, a Colorado-based consultant specializing in medical marijuana-related businesses. “It is an actual right of a Colorado citizen to use medicinal marijuana if a physician sees fit.” Amid a down economy, the lure of a lucrative business opportunity has fueled rapid growth in some areas, leaving those with unclear or loose parameters scrambling to catch up or make corrections on the fly.

Los Angeles failed to set guidelines out of the gate, and the number of dispensaries grew at an alarming rate—an estimated 1,000 by the end of 2009. The city council is currently working on ordinances to create buffer zones and limit the number of allowable dispensaries to 100. Former talk-show host Montel Williams, who suffers from multiple sclerosis and who has become one of the nation’s most well known medical marijuana activists, has stepped in to urge the council to craft a better ordinance, but finding an acceptable balance so far has been illusive. Insuring the Industry There’s no doubt the current economy plays a distinct role

Schedules of Controlled Substances The U.S. Controlled Substances Act (Title 21 United States Code, Subchapter I, Part B Section 812), regulates the availability of drugs in the U.S., whether they can be prescribed, and to what extent. Drugs are classified into one of five schedules.

Schedule I

A category of drugs not considered legitimate for medical use. Included are heroin, lysergic acid diethylamide (LSD), and marijuana.

Schedule II

A category of drugs considered to have a strong potential for abuse or addiction but that also have legitimate medical use. Included are opium, morphine, and cocaine.

Schedule III

A category of drugs that have less potential for abuse or addiction than Schedule I or II drugs and have a useful medical purpose. Included are short-acting barbiturates and amphetamines.

Schedule IV

A medically useful category of drugs that have less potential for abuse or addiction than those of Schedules I, II and III. Included are diazepam and chloral hydrate.

Schedule V

A medically useful category of drugs that have less potential for abuse or addiction than those of Schedules I through IV. Included are antidiarrheals and antitussives with opioid derivatives.

SPRING 2011

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15 States and D.C. Have Legalized Medical Marijuana

Alaska Arizona California Colorado Hawaii Maine

Michigan Montana Nevada New Jersey New Mexico Oregon

Rhode Island Vermont Washington Washington, D.C.

17 States with Pending or Attempted Legislation or Ballot Measures to Legalize Medical Marijuana

Alabama Delaware Illinois Iowa Kansas Maryland*

Massachusetts Mississippi Missouri New York North Carolina Ohio

in the unexpected speed of growth for medical marijuana dispensaries and related businesses. In turn, the insurance market is faced with amplified demand to create and provide insurance coverages as for any other business, including general liability, workers’ compensation, auto, equipment, crops, stock, malpractice, event, cargo, E&O, professional liability and even cyber coverage. Offering insurance products for the medical marijuana industry has presented a challenge from the beginning, and policyholders tend to keep their carrier names hush-hush for fear of drawing unwanted attention and possibly losing their coverage. In Colorado, where there are roughly more than 700 dispensaries and 105,000 patients, coverage has been historically difficult and expensive to obtain. “There is not much competition at this point so the price for insurance is very high,” says Randy Good, president of the Colorado Bottling Company, which produces medical marijuana edibles. Good’s company takes

Pennsylvania South Dakota Tennessee Wisconsin Virginia

its security measures seriously, adhering to state regulations and even adding bulletproof glass and bulletproof drywall in its facility. Over time, the state has seen considerable improvement. “In the beginning, we called tons of insurance companies to no avail,” says Morrissey. “But as the laws became more stabilized, the insurance industry was much more accepting and insurance agents started calling us.” “Right now there is no standard market, so you have to go to excess and surplus markets, where there is a high minimum premium,” says Bob Collimore, chairman of Kuffel Collimore & Company, a professional independent insurance agency based in Aurora, Ill., that has obtained coverage for dispensaries in nearly every legal state. “Rates overall tend to be anywhere from 50% to 100% higher compared to similar businesses.” Collimore currently works with such carriers as Colony, Evanston, James River, and Lloyd’s of London. Insiders feel that, as the industry raises its standards and the insurance community

f e a t u r e | S m o k e o n t h e h o ri z o n

New Development: Pot Raid Coverage Medical marijuana raid coverage, announced in February 2011, provides the first ever policy endorsement to cover government action anywhere in the world. The coverage is designed to protect legally operating medical cannabis businesses—dispensaries, collectives, cooperatives, cultivators and caregivers—raided by state or local law enforcement agencies provided the operations have adhered to all specified state and local cannabis-related guidelines and are found innocent of all raid-related charges. It does not cover property seizures conducted by the federal enforcement agencies such as the DEA. Visit www.mmdinsurance.com for more information.

can look at real numbers and historical data, there will be a greater comfort level with dispensaries and growers, and better products and pricing will become available. “To me, the exposure is not that great by comparison, but traditionally conservative standard companies are not willing to jump in without statistical data,” says Collimore. “I have heard of property claims, such as burglaries and break-ins, but no actual liability claims.” Collimore deals with one California company that will only write workers’ compensation through an assigned risk pool. Their unease is due to the possibility of holdups that could lead to employee injury. Underwriting standards in any new market can be slow in development. However, one company has taken the lead to develop aggres-

sive underwriting standards. California-based Statewide Insurance Services’ National Director Mike Aberle painstakingly has created better business practices and underwriting guidelines specifically for medical marijuana dispensaries, cultivators and related businesses. Their standards are tough and include special requirements, such as a hefty security system, special safes and camera surveillance. “We work currently with five of the largest national A-rated carriers who write this type of business, and we insure some of the largest concerns, including the International Cannabis and Hemp Expo,” says Aberle. “Now, carriers come to us for help in developing their programs.” Because of the changing landscape, Statewide actively meets with industry leaders to build better programs

One of the most unique “edible” offerings available is Keef Cola, which contains ingredients typically found in softdrinks, such as aloe vera, vitamins B and C, electrolytes, fiber, sugar, and natural and artificial flavors.

SPRING 2011

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that protect the dispensaries, delivery services, and growers. They also provide help with recommendations, requirements, education and community support. Municipalities have requested their underwriting policies so they, in turn, can provide better ordinances around these businesses. Aberle sees coverage costs a bit differently than others in the industry. “Just two years ago, premiums for theses businesses were off the charts. Today, we’re seeing pricing that is in line with comparable industries,” he says. A Diverse Niche Marijuana is said to have unprecedented benefits compared to currently prescribed medications, including pain relief, decreased nausea, increased appetite and muscle relaxation. Many cancer and AIDS patients claim a compelling increase in their quality of life. For patients who don’t want to smoke the product or who need the medication to take effect more quickly, there are options such as brownies, nachos, cookies, trail mix, popcorn and soft drinks— known as edibles. Edibles present more challenges for insurers. Once cooked up in home kitchens with few controls, today the edible segment of the industry is handled in many cases like any commercial kitchen and regulated similarly. However, labeling is still a major issue. Products crossing state lines and possibly getting into unintended hands have legitimate businesses a bit fearful. “I don’t know the consequences for a business in the scenario where a patient buys a lollipop in a Colorado dispensary, packs in it in their luggage, flies to Florida where

it’s not legal, loses the lollipop, and a child gets a hold of it. What then? I’ve not heard of that happening yet, but that is where packaging, insurance and liability need be worked out,” says Morrissey. By using a little creative language, some dispensaries have been able to purchase standard insurance through their agents. They have been placed as “tea” or “herb” shops, according to Collimore. With this kind of trickery, he is unable to compete in price. Moreover, the practice presents unintended exposure for carriers. Many of the frontrunners didn’t get into the industry to smoke pot in the back room. They have a compelling personal story of medical marijuana significantly improving the quality of life for a loved one. Aberle was inspired by his mother-in-law, who passed away from ovarian cancer. Good’s ex-wife suffers from multiple sclerosis. Medical marijuana is much more than a business opportunity for many advocates driven to showcase the legitimacy and benefits involved. To date, 64% of states have either enacted an amendment or law to legalize medical marijuana use or have developed legislation toward that end. For carriers keeping an eye on the horizon, the demand for medical marijuana-related business insurance is rising. Standards will likely continue to be in flux in the early stages, so staying on top of the issue will prove to be invaluable. From the look of things, it isn’t “if” these businesses will be on your doorstep, but “when.” cA Bevrlee J. Lips is the publisher and editor of Claims Advisor.

May 22–24, 2011

San Diego Convention Cen

ter, San Diego CA

um.org www.acordlomafor

CLAIMS ADVISOR | SPRING 2011

tech talk | master data management

Data Dum Using master data management, an insurer can turn a data junkyard into a mechanized marvel.

SPRING 2011

www.claimsadvisor.com

a mp

Quick Look C Information on vendors, policyholders, property and events often can’t be used in a strategic analysis of a claim because it’s entered inconsistently and/or locked in a unit’s data silo. C Master data management not only improves access to information, it increases data quality. C A successful master data management initiative requires process, organization and technology changes.

By Joshua Schwartz

An insurer’s store of data is one of its prime assets. Historically, this information has been locked away in the business units where the data originated. Customer information, policy and product data, preferred vendors and business partners, and claim information is usually accessible only in the systems in which they originate and reside. That siloing can inhibit the company’s ability to exploit the richness of the data and can limit its value in the evaluation of claims. One solution is master data management, or MDM—software and programs that make data assets available and usable enterprise-wide. Insurers that have grown through acquisition compound the volume of data for which they are responsible. Post-merger integration plans typically account for the costs to integrate systems; however, they rarely account for the costs to integrate data from multiple sources and the analysis required to resolve differences in data models,

business validation rules and data relationships. Master Data Management Master data are core pieces of information needed to uniquely define entities that are shared throughout the enterprise. They have a common set of characteristics, regardless of domain or industry. These include being uniquely identifiable in distinct domains that reflect data important to running the business. For an insurer, this may include products, claims, customers, agents, employees or vendors. Master data should be shareable across business functions and is defined according to company business policies. Finally, master data must be consistent, accurate, highly available and of high quality in order to be used across the enterprise. Master data management is the process of creating, managing and sharing such data across an enterprise. The ultimate goal of MDM is to create a single version of the

truth so the business can be confident in the information it is using to make decisions. To achieve this goal, MDM requires convergence of processes, organization and technology to enable common and shared data definitions. It will provide timely, accurate, accessible and complete data to all enterprise applications. MDM unlocks data stored across the organization in various systems and formats (e.g., claims applications, policy admin systems, customer relationship management, self-service portals, and other servicing applications). For most insurers, there are likely several applications capturing data for each line of business sold. An insurer selling both commercial workers’ compensation and personal auto insurance is unlikely to have a single application that captures both types of policies. However, the information captured in these applications may be similar and helpful to

other business functions (e.g., first notice of loss or special investigations). In claims processing, MDM can lead to a reduction of data input errors during FNOL and claim setup, a consistent view of customers’ claim and interaction history through the claim lifecycle, an improved ability for customer self-service through the claim adjudication process, and an efficient approach to analyzing claim history across an insurer’s book of business. Today’s insurance customer demands an improved and consistent experience across all channels and interactions

tech talk | master data management

with their insurer. These expectations benefit insurers that maintain a single view of the customer based on the products, claims and relationships with the insurer. MDM applications, specifically those focused on customer data integration, relate customer records from various sources to provide a complete and comprehensive customer view. Historically, policy administration systems have allowed users to input more than one customer in unstructured data fields. If a single data field contains multiple policyholders (e.g., “Mr. John V. Smith and Mrs. Samantha Browne-Smith”), then automated policy verification during claim intake can fail. Automated front-end parsing of customer name information at the time of data entry would separate the above example entry into two distinct customer records associated to the policy. As a result, the insurer would find more claims eligible for straightthrough processing, reduce

SPRING 2011

manual work required on claim intake, and improve downstream claims analysis on its customer base for future underwriting and risk management. Claims applications typically capture and store claim information locally, often replicating the data to an enterprise data warehouse. There is tremendous benefit from integrating that same claims information via an MDM tool and making it available to share across multiple channels. An agent able to see claim or loss data as part of a customer’s consolidated interaction history can reinforce customer service and address the customer needs at the point of sale. How MDM Improves Data Quality Ensuring quality and accuracy of master data, especially in the customer data domain, is a common challenge for insurers. Business processes typically address data quality through downstream audits and resolution of discrepancies in operational data stores. As a result, insurers have difficulty parsing, standardizing or evaluating data against pre-defined business rules, as well as identifying patterns for predictive modeling. Current trends in proactive data quality management integrate technologies such as name and address standardization software into front-end business processes. When adding address information for an involved party on a claim, standardization software can validate an address against USPS standards to store a guaranteed accurate mailing

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address. It can also help to identify anonymous values, or “dummy data,” (such as a Social Security number of 999-99-9999 or date of birth 01/01/01). Data standardization software can cleanse, verify and standardize names and addresses. Data inaccuracies, especially with customer contact data, can affect an insurer’s ability to comply with regulatory requirements for written communications to claimants. If a customer address is incorrect, it may be several weeks until the claims department is alerted to the error. Not only does this impact the customer experience, it also may put the insurer at risk for non-compliance. Improved data quality management within the vendor data domain has the potential to provide operational efficiency and reduce loss allocated expense within individual claims. For example, claim handlers may input vendor data directly into the electronic claim file. As a result, downstream systems are unable to accurately reconcile the aggregate amounts paid to individual vendors due to data inconsistencies. For example: • Claim 1 is an auto claim that includes physical damage to the claimant’s car. The body work is performed by and recorded on the claim file for “Joe’s Auto Shop.” • Claim 2 is a similar type of claim, and the body work is performed in the same location. However, the claim handler records the vendor as “Joe Brown Auto Garage, LLP.” Without a master vendor list, these two vendors may appear in analytical reports as two separate vendors. The insurer

will be unable to negotiate potential pricing discounts because it cannot relate spending to the two seemingly unrelated vendors. An MDM solution would use other information available (address, phone number, taxpayer identification number) about the vendor to connect the records and present a more complete view of the insurer-vendor relationship. The master vendor data can be pushed upstream in the claims process by allowing claim handlers to search and retrieve the best-known vendor data and associate it to the claim. This not only reduces the time to enter data, but also increases efficiency of the claim handler. The Keys to Success Planning and executing a successful master data management initiative requires process, organization and technology changes. According to Gartner Predicts 2011, “Through 2015, 66% of organizations that initiate an MDM program will struggle to demonstrate the business value of MDM.” Therefore, governance in each area is a prevalent theme that relies on both business and technology ownership to manage and integrate the data across domains. The first step is to design an organizational structure that satisfies enterprise requirements. Insurers should identify an owner for master data assets and for each domain across business functions, then develop a data stewardship program to enforce consistency and reusability for data delivery and use. This can be accomplished by defining roles and responsibilities to be performed by data architecture teams to help ensure adherence to standards across the

enterprise over time. The next step is to create common and shared processes for defining, administering and governing master data across the organization. Establish governance processes and decision-making guidelines for master data to manage both implementation and maintenance. Identify and inventory sources, producers and consumers of master data, documenting how they use information. Finally, insurers should look at their technology needs to create, administer and share global data resources. This includes software to help establish a single version of master data containing uniquely identified records from various business and information domains. Other

tools to manage supporting data (hierarchies, metadata, and reference data) across the enterprise are also needed. As an insurer considers data usage, it should develop integration platforms to support the movement of master data between operational systems and across external entities The success of MDM programs hinges on strong senior executive support. Insurers attempting an MDM program must lay out strategic elements, such as how the program supports increased customer intimacy, customer centricity, and increased share of wallet, and tactical elements, such as improving tactical data management processes, increasing operational efficiencies, and reducing costs through data

accuracy and reuse. Without clear goals, the enterprise may not align to the program’s objectives, and organizational resistance to change will limit the program’s benefits. The technology marketplace for MDM solutions is growing as vendors mature their product offerings and new vendors enter the market with expanding solutions. Due to the growing demand for MDM, the current trend of solution providers is to acquire niche products and integrate them into larger MDM software suites. Informatica’s purchase of MDM vendor Siperian, IBM’s acquisition of Initiate Systems and TIBCO’s acquisition of data-matching vendor Netrics are indicative of the expected growth and activity in this space. For these

and other vendors, products range from consolidated models that centralize all data to lightweight registry-style MDM solutions that manage relationships to federated data across the enterprise. An insurer’s product selection will vary based on its objectives and data management goals. Data management can be done piecemeal, but insurers that undertake master data management addressing the entire gamut—organizational structure, data governance processes and key technology enablers—will realize exponentially greater returns on the investment. cA Joshua Schwartz is Director, PwC’s Diamond Advisory Services. (845) 893-7327, joshua. schwartz@us.pwc.com

CLAIMS ADVISOR | SPRING 2011

t e c h t a l k | c y b e r n o o k s a n d c r a nni e s

Taking a Byte

Out of Cyber Secr Forensic technologists can help verify or unwind intricate claims whose details are bound up in cyber nooks and crannies. By Karl Epps

SPRING 2011

Bit by bit, information gets stored in various locations. That information could be critical to the proper evaluation of a claim, but a standard inquiry into computer files might not reveal all that’s out there. The information stored in computers often represents the largest accumulation of data for an organization, but it likely does not include all relevant data. External devices such as backup drives, USB keys/flash drives/memory sticks, CD/DVDs, cell phones, PDAs, copiers, fax machines and iPads contain a wealth of data that may duplicate or expand on the stored data. In addition to these physical storage locations, there are social media sites that can house large amounts of information. These include Facebook, Twitter and LinkedIn as well as “cloud” backup locations, such as Carbonite, DropBox and Microsoft’s Live Mesh. In the case of an investigation, it is a mistake to limit your search to what is thought of as the traditional

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computer when there are so many potentially rich data stores available. Think of it this way: A 16-gigabyte memory chip, the size included in the current Droid cell phone, is about the size of your thumbnail and can hold approximately 320 500-page college text books or about 3,200 MP3 files. Investigating a Claim Today, over 90% of the world’s information is being generated and stored in digital form, and more than half of all business documents created never become paper records. In fact, when it comes to receipts, invoices, and other recordkeeping, it’s very difficult to find paper copies at all in some industries. On the other side of the coin is the vast, new, digitized record of communications. The simple “word of mouth” and telephone conversation have been transformed, often to the benefit of the claims examiner, into

Quick Look C With the emphasis on going paperless, much of the evidence needed in claims disputes is buried on hard drives somewhere. C On the other hand, communications that were previously hearsay are now often part of the permanent digital record.

recy

C Sending a forensic technologist down the right trail can yield a good haul of valuable data.

CLAIMS ADVISOR | SPRING 2011

t e c h t a l k | c y b e r n o o k s a n d c r a nni e s

a plethora of data. The key is finding all that you need and not much more than you need. That’s where a claims unit can benefit from coordinating with a forensic technologist. A forensic technology investigation usually arises in one of two ways—in criminal cases, following the seizure of computers and other external data sources; or in a civil litigation, when there is a basis for believing that relevant data has been withheld, misrepresented, forged, falsified, modified or otherwise manipulated. In civil litigation cases, a demand is made for an image of the computer system and identifiable external data sources. It is important that the investigator capture all data sources in the initial acquisition and that plans are made for a full investigation. Regardless of whether or not the plan is only to do a quick search, the imaging process is the same. In most cases, there is only one opportunity for this data acquisition step. It is imperative that all cases are treated as if they will be litigated in a court of law; to do otherwise can endanger the evidence and outcome. In some cases, additional data sources will be identified in the course of the investigation. It will be necessary to obtain specific authority to access those sources, but it is generally frowned upon and can undermine expert testimony if repeated requests are made for the same data sources. Once the data sources have been imaged, the forensic technologist will begin the investigation. This is where the claims management process can have a major impact on the ultimate success and cost of the forensic investigation. Prior to the analysis of the electronic data, there

SPRING 2011

should be a meeting between the claims professional, attorney and forensic investigator. During this meeting, the technologist should be given sufficient information to provide a focus for the investigation. While each case is different and other information may be pertinent, the claims professional should generally be prepared to provide the following information at a minimum: • Nature of the Case – The key issues that drive the case and the amount of damages. • Key Parties – The relevant people who may have received or created correspondence or other types of documentation. This should include known nicknames and aliases. • Key Dates – The earliest and latest dates on which data relevant to the key issues could have been created or received. • Keyword Lists – Words that are tied to the issues involved in the case. • Business Contacts – Businesses or other entities which may be involved in the issues being addressed. • Dollar Amounts – Key dollar amounts, such as specific payments believed to have been issued or monies that are in contention or missing. This should also include relevant account numbers and bank names. • Known E-mail Accounts and Websites – E-mail accounts and websites relevant to the case that were used or believed to have been accessed by the parties. • Known or Suspected Areas of Inconsistency, Exclusion or Alteration

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0101010101010101010 101011001010101010 of Data – Those issues will recognize when a thread which gave rise to the of information or data should request for the forensic be pursued. From a cost 01010101010101010 technology imaging prostandpoint, following a thread cess to be initiated. found within an identified 1010101010101010 • Date of Subpoena scope is far less time consum– Where applicable, an ing than a search to determine investigator should always 010101010101010 where a thread might exist. ensure that subpoenaed As an additional cost-savdata repositories were ing measure, the investigation 10101010101010 sequestered and that no should include a plan for additional manipulation periodic updates. The claims was done on them. It may professional can request that 01010101010101 be found that, after the a follow-up be held after the subpoena, data was delet- initial investigation to review 10101010101010 ed or modified in an effort any evidence found and to to hide evidence. On a discuss the direction of the computer, it may even be 010101010101010 case. There are several reasons possible to recover deleted why this is important. data or to find evidence First, information un1010101010101010 of programs used to covered by the investigator securely delete data. An may be relevant to other parts Internet history may 01010101010101010 of the investigation, such as reveal research performed development of interrogatoto that end. Intentional ries and document requests. destruction following10101010101010101 Second, periodic updates will a court order would provide a sense of whether result in “spoliation,” or not substantive progress is 010101010101010101 intentional or negligent being made and, if so, in what withholding, hiding, areas. Third, the sharing of 101010101010101010 alteration or destruction information assists the entire of evidence relevant to team in determining if data a legal proceeding. The sources are exhausted or if 0101010101010101010 logical conclusion is additional review is necessary. that the party destroyed After the initial search, 10101010101010101010 the evidence to protect the investigator will have himself. The court’s developed a plan as to where penalties for spoliation additional investigation should 01010101010101010101 can be very severe. be performed. During these consultations, the insurer can 10101010101010101010 Claims personnel should make the decision about stratprovide as much specific inegy and further exploration. formation as possible in order When legal counsel, claims 01010101010101010101 to control the scope and hone professionals and forensic the focus of the computer technology investigators work 10101010101010101010 forensic investigation. These as a team on cyber data collecinvestigations become very tion, what was once impossible expensive when they include to document becomes a rich 010101010101010101010 general searches as opposed to source of evidence. cA focused ones. 1010101010101010101010 Managing the forensic Karl Epps is an EnCase Certitechnology process to improve fied Examiner (EnCE) and the cost effectiveness does not director of Technology and Fo01010101010101010101010 mean limiting a proper and rensic Technology for Epps CPA necessary follow-up when Consulting in Scottsdale, Ariz., 1010101010101010101010101 relevant information is found. www.eppscpa.com. (602) 463An experienced investigator 5544; karl@eppstech.com 0101010101010101010101010 101010101010101010101010

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CLAIMS ADVISOR | SPRING 2011

COM P R EHE N S I VE V I EW | BE S T AUD I T P R ACT I CE S

Pea The

You can avoid a fire and brimston audit experience by using these eight great best practices.

We all know the old saying, “Timing is everything.” When it comes to audits by state regulatory bodies, however, there’s a little more to it—timing and positioning are everything. In most cases, state regulatory agencies will schedule claims reporting audits in advance, so preparing for them and addressing issues identified in previous audits is crucial. Audits are a complex, often challenging requirement, but they’re a fact of life. With the right internal business processes, cooperation with colleagues

SPRING 2011

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arly Eight By Cindy Hall, PMP

Quick Look C State audits can go smoothly if you keep clean books and have an orderly process the day of. C Expand your team to include your system vendor, and have all hands on deck to answer the auditor’s questions. C If problems identified in your last audit persist, be prepared to offer a hard timeline for results and a clear plan for progress.

and peers, and confidence in data validation and accessibility, audits can actually be an opportunity to improve the overall claims administration process and even introduce new efficiencies that can reduce an insurer’s claims costs. Top Eight Ways to Succeed in State Audits of Workers’ Comp Claims 1. Understand the state bureau’s objectives. At the most fundamental level, state audits are meant to ensure that injured parties are being paid promptly.

That’s why the bottom line for most audits comes down to determining if an insurer and its claims administrator are effectively monitoring transactions and maintaining compliance without being compelled to do so. The basis of a successful audit begins well before the actual inspection. This means, at a minimum, providing workers’ comp claims data in the timelines prescribed. The information in question often includes calculations of benefits, submission of first reports of injuries, subsequent reports of injuries, and pay-

ments of indemnity benefits. Audits can also extend to a survey of the business as a whole, including financial records and ledgers as well as financial reserves. 2. Build your audit team. Having a team approach to audits is essential for success. No single person has all the answers or ready access to all the resources needed to maintain compliance or to demonstrate that compliance during an audit. As an ongoing endeavor, collaborate with colleagues and involve external

CLAIMS ADVISOR | SPRING 2011

COM P R EHE N S I VE V I EW | BE S T AUD I T P R ACT I CE S

resources, including technology systems vendors, to ensure that you understand the impact new laws and mandates have on your organization and its actions. This kind of proactive approach can prevent accidental non-compliance. When an audit is scheduled, contact those who need to contribute as early as possible. Audits require that an immense volume of data and materials be available, and gathering that information is a big job. Make sure that contributors will be on hand during an on-site audit to answer the auditor’s questions, and make it a point to talk to your peers in other organizations who have gone through the same kinds of audits so that you’ll have

the best possible idea of what to expect. At the time of the audit, on-site access to the claims administration system will be needed, and expert, technical and/or vendor-provided guidance on how to extract data could prevent glitches and delays that frustrate the auditor and stymie the process. If the insurer or claims administrator is “paperless” and has all its information inside a computer system, the auditing staff will probably need separate workstations and will surely need access to the claims databases. In this case, you would need to provide technical and end-user staff to assist in the use of the system. In the ideal scenario, you would want the most experienced users

to guide the auditors through the system; doing so will ensure that the auditors get clear, concise information, look in the right places for the data they need, and can easily view and track the files in which they’re interested. 3. Get ready for electronic audits. Claims departments are audited for a variety of criteria and in a number of ways. Most states still conduct on-site audits, and auditors will notify insurers in advance of the event. Some states, however, perform automated, remote audits on a regular basis using system-automated reports that list late reporting, late payments, reporting data errors, and the like without even sending an auditor to the insurer’s claims department. As more and more states move toward exclusively electronic claims reporting, audits are likely to become more automated and more frequent, and insurers may have less time to rectify problems before the auditor has his eyes on the records. This trend means that it’s increasingly important for claims departments to be aware of the specific regulations in each state in which they operate, any potential gaps in the reporting solutions provided by the claims administrator’s systems, and any recurring situations resulting in late payments to injured parties or late reporting of claim information to the state. 4. Self-audits: painful but necessary. Many claims departments fall short in a task that can be time-consuming and laborious to implement but that generates strong returns in the form of successful audits: namely, the internal audit. As states move toward automated remote audits, it’s essential that claims departments evaluate themselves more frequently and look for the same kinds of potential gaps and issues that the states themselves are seeking to uncover. In the event that a state audit identifies issues not brought to light in an insurer’s or claims administrator’s internal audit, the carrier and/or administrator can significantly mitigate potential fines and penalties by demonstrating that it has proactively taken steps to maintain compliance, including regular self-audits.

SPRING 2011

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5. Identify and rectify recurring problems. States rarely expect an insurer to score perfectly on an audit. Fines, penalties and sanctions usually do not stem from first or second infractions. Claims departments do, however, leave themselves open to significant exposure during audits when they fail to address and correct issues identified in previous audits or reviews. It’s essential to closely study the results from previous audits and rectify the most frequently occurring and severe problems. If a claims department cannot completely correct a problem identified in a prior audit, it should be prepared to show the steps taken to address the issue or its root cause and to define a resolution timeline for the auditor. 6. Let your claims administration system help you address recurring issues. Claims administrators, TPAs and claims departments can and do often overlook the potential in their claims administration system to address recurring issues identified in audits. Start early to review promised changes and address system functionality, and let the claims administration system help meet audit-identified shortcomings. Either in preparation for an audit or as soon as possible after, a request should be made of the system vendor to add or modify system functionalities to meet state reporting requirements or allay the auditor’s concerns.

departments understand the importance of working with their technology partner to capture the required data elements in the system. In many cases, the data are already being captured; in other instances, however, the claims administration system needs to be modified. Frequently, the system needs to have a new field, checkbox or drop-list box added to a screen, which allows the end user to capture the data during the normal course of claims administration. Just because a box has been checked or a field completed, however, does not mean that the data are ready to be collected and reported. Providing data validation that immediately alerts users to data issues or errors is key. Data validation can also include reports to claims supervisors as well as messages to the end users. The overall goal of data validation is to ensure that the data have been processed without errors before the report is submitted to the reporting bureau, thereby achieving successful reporting transactions without returned errors or delays in

further processing. Claims departments should look to their claims administration system vendor for data validation. Ask the vendor the hard questions, including: - Can we capture the data required? - How will a user (adjuster) know when there is an error? - How can we fix an error and then have the system perform data validation again? - What’s the purpose of the data in question? - What’s involved in developing a solution to meet this new reporting requirement? Getting data corrected and validated prior to reporting to the auditing organization is one thing, but you also need to know the results of the data reporting and know the results of the report submission as you work through day-today claim events. Ensure that your claims administration system can handle bureau responses and communicate the results back to users (in reports or on user diaries, for example). This will ensure

that, if there are errors to address, the user can tend to them and get updates back to the state as soon as possible. 8. Don’t rely on help from the auditor. Although audit experiences vary widely, don’t expect an auditor to share insights or helpful suggestions on the day of the audit. That’s not to say auditors aren’t nice folks but, rather, that auditors represent the enforcement side of the regulatory agency overseeing a claims department. Their job is to gather the information needed to determine an insurer’s or administrator’s level of compliance. Respect the auditor by being as open and helpful as possible. Being audited doesn’t have to be a fire and brimstone experience. By following these eight best practices, you will be well prepared and may even find that the benefits of routine audit preparations are a blessing in disguise. cA Cindy Hall, PMP, is compliance manager with Aon eSolutions and sits on the IAIABC EDI Council. cindy.hall@aon. com or (925) 242-4609.

7. Look to the claims administration vendor for data validation. When a new law comes into effect or when a law is modified, most claims

CLAIMS ADVISOR | SPRING 2011

m e d i c a l m u sings | s u spi c i o u s s y m p t o m s

Feigning Spell

Know how to identify mal as mental heal 50

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www.claimsadvisor.com

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lingering lth fraud.

Quick Look C About a third of personal injury claims are embellished or feigned. C The DSM-IV-TR offers an index of suspicion that helps in evaluating cases for malingering. C Red flags may be present at the claims interview, during the clinical process or in test results. Be aware of them.

By David R. Price, Ph.D.

Mental health fraud is a significant problem in North America. It is potentially easier to commit than any other kind of healthcare scam. Malingering, the feigning of an illness in order to receive compensation or avoid duties, is of particular concern to the insurance community. Malingering is often associated with personal injury claims involving psychiatric or psychological disorders, such as mild traumatic brain injury (MTBI), post-traumatic stress disorder (PTSD) or depression. In the evaluation of any mental or emotional injury claim, the possibility of malingering or symptom exaggeration must be considered. One authority, J. Randall Price, has identified the following five types of malingering that should be considered in claims involving compensation: 1. Simulation – The citing of symptoms that do not exist. 2. Dissimulation – The concealment or minimization of existing symptoms. 3. Pure Malingering – The citing of a disease that does not exist at all.

Partial Malingering – The conscious exaggeration of existing symptoms or the assertion that prior genuine symptoms are still present. False Imputation – When authentic symptoms consciously recognized to have no relationship to the injury are attributed to it.

There is a sixth component of malingering that also needs to be considered by a claims evaluator: iatrogenic imputation, which occurs when an examiner or treatment provider attributes genuine symptoms unrelated to an injury to that injury. In 1980, in response to the growing concern of malingering, the Diagnostic and Statistical Manual of Mental Disorders, Third Edition (DSM-III) published an index of suspicion for malingering on pages 331332 which states: The essential feature is the voluntary production and presentation of false or grossly exaggerated physical or psychological symptoms. The symptoms are produced in pursuit of

a goal that is obviously recognizable with an understanding of the individual’s circumstances rather than of his or her individual psychology. Examples of such obviously understandable goals include: to avoid military conscription or duty, to avoid work, to obtain financial compensation, to evade criminal prosecution, or to obtain drugs. Under some circumstances malingering may represent adaptive behavior, for example, feigning illness while a captive of the enemy during wartime. A high index of suspicion of malingering should be aroused if any combination of the following is noted: (1) Medicolegal context of presentation; e.g., the person was referred by his attorney to the physician for examination (2) Marked discrepancy between the person’s claimed distress or disability and the objective findings

CLAIMS ADVISOR | SPRING 2011

m e d i c a l m u sings | s u spi c i o u s s y m p t o m s

(3) Lack of cooperation with the diagnostic evaluation and prescribed treatment regimen (4) The presence of antisocial personality disorder. These malingering criteria have essentially been unchanged and were brought forward into the Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition, Text Revision (DSM-IV-TR). Each psychological or neuropsychological injury claim should be evaluated for these four factors. The following guide may aid in investigating such claims. 1. Medicolegal context of presentation Examine for the presence or absence of the following: Patient is attorney-referred for evaluation or treatment; the case is clearly identified as in litigation or subject to a workersâ&#x20AC;&#x2122; compensation claim; the case is referred for disability evaluation; an attorney is being billed for treatment or is being copied on all correspondence;

the treatment provider documents meeting with the claimantâ&#x20AC;&#x2122;s attorney. The presence of any of these would suggest that the medicolegal criterion has been met. 2. Marked discrepancy between claimed stress or disability and objective findings Examine for the presence or absence of the following: normal MRI, CT scan, EEG or X-rays; physician releases from treatment; a low impairment rating given by a physician; the person is released to return to work and does not return; there are no abnormal psychological or neuropsychological tests; recovery curves are not consistent with research literature; the claimant continues to get worse or doesnâ&#x20AC;&#x2122;t get better at all. 3. Lack of cooperation Examples of this criterion would include the patient not reporting prior psychiatric or psychological treatment, previous medical evaluations, history of mental illness, or substance abuse; the patient failing

to comply with prescribed medication protocol or other recommended treatment; the patient distorting prior academic or work performance; and evidence of any invalid psychological and neuropsychological tests. 4. The presence of antisocial personality Examples of this criterion may include diagnosis of any type of personality disorder; criminal history; multiple marriages; erratic work record; or history of substance abuse. Red Flags In addition to using the foregoing guide for evaluation of malingering, the claims adjuster would do well to look for the following red flags. Background and Character Weaknesses Examine for greater than typical need for financial support; desire to avoid or escape job situation; being a marginal member of mainstream society; having a poor work history, poor credibility or dishonesty; indications

of antisocial, narcissistic or borderline personality disorder; past employment in healthcare, insurance or legal fields; reared in a family with a disabled role model; cohabiting with a disabled adult; substance dependence/abuse; previous incapacitating injuries; and prior claims for an injury or claims litigation. Abnormal Responses to Examination or Treatment Red flags may include refusal to be examined; missing or canceling an examination or treatment appointment; refusal of hospitalization or treatment; non-responsiveness to treatment; adamance that treatment will not succeed; evasion of questions and avoidance of direct answers; exaggerating confidence to examining doctors before an opinion is rendered; threatening doctors or claims managers; attempting to control medical examinations by intimidating or bizarre behavior; continually making statements obviously designed to enhance credibility; depicting prior functioning in excessively complimentary terms; criticizing examiners for their performance; and submitting to examination only in response to a court order or termination of benefits. Any of these red flags could indicate a lack of claimant credibility. Disposition at Claims Interview Some malingerers display sketchy tendencies during their claims interview. Determine if the patient is involved in litigation or criminal proceedings, has obvious secondary gains from having a deficit (avoiding work, obtaining money),

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claims a severe disability following a minor injury, refuses employment under partial disability, or doesn’t follow through on available treatments. Some of the behavioral red flags at an interview include: a lack of or inconsistent cooperation; suspicious, aloof, uneasy or unfriendly behavior; evasion or many “I don’t know” answers; unusually great detail of events surrounding the cause of injury; an unusually large number of symptoms or inconsistent or absurd reporting of them; non-selectivity of physical, emotional, or cognitive symptoms; and an over-idealized functioning or lack of reasonable difficulties before accident. Questions that can draw out evidence of malingering should focus on participation in activities not consistent with the reported deficit; a discrepant capacity between work and recreation; significant financial stressors; and the pursuit of examinations and treatments without consulting experts, which might indicate an attempt to treat a non-related problem. Sometimes, malingering patients present as “victims” and will tip their hand by blaming others or attributing all life’s problems to the injury.

The same holds true for random wrong answers or decreasing effort as test items increase in difficulty. If a patient’s testing results raise suspicion or they score high on direct measures of malingering, further evaluation by a specialist is warranted. Fraudulent claims in mental health and exaggerated claims in personal injury are fairly pervasive. In an article by Mittenberg, Patton, Canyock, and Condit titled “Base Rates of Malingering and Symptom Exaggeration,” the authors reported that the base rate of malingering by referral type was 30.43% for personal

injury claims and 32.73% for disability or workers’ compensation claims. What the evidence indicates is that about a third of personal injury claims for compensation are likely to be embellished or be consistent with malingering. This high rate compels the claims examiner or adjuster to carefully scrutinize cases for malingering. When a problematic case is identified, those claims should be referred for more stringent evaluation. cA David R. Price, Ph.D., is president of The Forensic Network in Greenville, S.C. drpricephd@aol.com

Clinical Picture Embellishment of symptoms is a red flag that a claimant may be engaging in malingering. Note if the patient is overly eager to discuss and call attention to symptoms, magnifies them, endorses rare or more blatant than subtle symptoms, shows unrealistic accuracy or attributes unrelated symptoms to the event under investigation. Sometimes the ailments described or the course of the disorder will be inconsistent with research literature, or the symptoms will “worsen” under observation. If the patient’s focus is on the degree of impairment rather than the condition or if he rarely acknowledges the ability to learn new skills or perform modified jobs, malingering should also be considered. Psychological and Neuropsychological Tests Vagueness, inconsistencies, lack of memory, evasiveness, and bizarre responses to tests can be red flags, but they can also be signs of real problems.

CLAIMS ADVISOR | SPRING 2011

a u t o k n o w | t r u s t b u t v e ri f y

Slash Loss on Costs Auto Gla By Peter Pearson

Pre-inspection protocols that verify damage prior to repair or replacement of vehicle glass are reversing the recent trend in illegitimate claims. Within the last year, the insurance industry has been hit by an increase in questionable vehicle glass claims, up 511% for the third quarter of 2010 compared to the same period in 2009, according to the National Insurance Crime Bureau. Questionable claims may range from fraud to complaints from policyholders of pushy salesmen offering free chip repair to reports that they were pressured into unnecessary glass repair. When reviewing work completed by glass companies that use high-pressure sales tactics at gas stations, car washes, etc., a Safelite Solutions study determined that repair or replacement was needed in only about half of the claims filed. In addition, many claims are being inflated. Replacement costs are being sought when only repairs are done, and more chip repair claims are being filed than were actually performed. By reducing

SPRING 2011

these fraudulent claims, the insurance industry could save up to $15 million in 2011. Tailored to Each Carrier To prevent insurance fraud and high-pressure experiences, many insurance companies are implementing inspection protocols to verify damage prior to scheduling a repair or replacement. Most recently, USAA announced its five-state pre-inspection program, which it undertook as a result of feedback from members indicating some felt coerced or pressured to make glass claims when in reality there may not have been any damage to their glass. GEICO made a similar announcement in January 2010. A pre-inspection program should be customized to fit the needs of the individual insurer and will best be based on trends specific to its region and clientele demographics. Programs vary on how inspections are managed depending on policy requirements and

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the carrier’s goals. Some programs require all vendors to undergo an inspection to validate the need for repair or replacement. Others may see patterns of particular vendors upon reviewing their records over time and require only those glass shops with repeated complaints to undergo the pre-inspection. Validations can be completed over the phone with an agent asking the policyholder questions about the damage, but carriers often mandate physical inspections. One of the core principles is to allow policyholders to escape high-pressure, “you have to get it done right now” sales tactics so they can make more informed and considered decisions regarding a possible claim. Another factor in determining if a pre-inspection program will benefit the insurer is the added expense and time required by its inspectors. There is often a substantial return on investment for insurers that are being hit hard by auto glass fraud. Others may find it more cost-efficient to outsource the service. No matter the method the insurer selects for its needs, it is crucial that policyholders be able to get

their cars repaired quickly while still ensuring the damage is legitimate. Most inspections happen within the first 24 hours of a claim being reported. Generally, initial feedback from policyholders who have experienced this new protocol has been positive. There are several reasons for this. If policyholders have legitimate glass damage, they typically contact their insurance company first and then schedule an appointment. This might take several days—the standard turnaround time. If the policyholder does not notice the damage but, rather, it’s pointed out by someone at the car wash or gas station unexpectedly, the damage is probably not so extensive that it must be fixed on the spot, and, therefore, the policyholder is comfortable with a time frame that includes the inspection. Additionally, pre-inspections are common with all types of vehicle claims except glass damage. It is a general process policyholders have come to expect. Win-Win Solution The increase of pre-inspection programs has been widely debated within the auto glass repair and replacement industry. The fact is that glass shops

Quick Look

ass Claims

that perform quality work on legitimate damage will not have their repair numbers decreased by the process. Policyholders benefit by being protected from filing unnecessary claims and being exposed to sub-standard repairs or replacements. Insurance companies benefit from improved policyholder experiences and a reduction in fraudulent or unnecessary claims. To date, pre-inspection programs have been implemented by several insurers in the following states: Arizona, California, Florida, New Jersey, New York, North

Carolina, Texas and Virginia. Preliminary data from these pilot programs show a significant drop in questionable claims and customer complaints. For example, one insurance company reported a 75% decline in referrals from specific glass shops since beginning pre-inspections in late October 2010. Perhaps the most dramatic drop was in Virginia, where one carrier began pre-inspections on questionable claims in April. As of the end of the year, these claims were down 95%. Depending on the work to be performed (repair or replacement) and the region

of the country, when insurance companies implement a pre-inspection program, the claims reported by some specific glass shops are reduced by 50% to 70% on average. Perhaps the greatest benefit to the insurance company is in increased policyholder satisfaction. Research shows that satisfactory small claims can increase a customerâ&#x20AC;&#x2122;s loyalty to an insurance company. Unfortunately, many of these shady repair companies that operate out of local gas stations, at car washes or door-to-door perform their services poorly. Customer satisfaction surveys show

C Questionable vehicle glass claims shot up 511% last year. C Pushy salesmen and shady repair shops have been billing insurers for unneeded repairs and unperformed work. C Pre-inspection programs for auto glass claims are producing some stellar results in pilot states.

that approval scores drop dramatically when service is provided by one of these lowquality providers. The Coalition Against Insurance Fraud estimates that insurance fraud costs the U.S. $80 billion or more per year, resulting in higher premiums all across the board. Pre-inspection programs are one more solution to reducing this costly problem. cA Peter Pearson is the senior vice president of Client Sales and Support for Safelite Solutions. (801) 209-3477, Pete. Pearson@Safelite.com, www. GlassClaim.com

CLAIMS ADVISOR | SPRING 2011

pulse Poll

Reader responses to monthly poll questions. Claims Advisor Pulse Poll - december 2010

Is your company’s claim workflow clean? Yes, we’re squeaky clean 43%

No, but we’re cleaning up our act 39%

Claims Advisor Pulse Poll - january 2011

Do you use texting to communicate with your insured during a claim? No, only phone, fax e-mail or hard copy 83%

Yes, but only for appointment setting and the like 7% Yes, all the time 6%

No, we’re satisfied with our current flow 16%

Don’t Know 24%

What are you crazy?! 2%

Take this month’s Pulse Poll online at www.claimsadvisor.com

SPRING 2011

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New Website!

Check out our new site redesign this month. You’ll find our print content, online exclusives and other new resources. And now you can get “social” with Claims Advisor and get the latest expert content as soon as it’s available. Check it out today!

Fun information bites, less fattening than pizza.

37,105,000 people

Are your company’s insureds on the move? The U.S. Census Bureau shows that nearly 13% of the population, or 37,105,000 people, moved in 2009. Renters were more likely to move than homeowners, and 67% of movers stayed within the same county. Do you know where your policyholders are?

Visit www.claimsadvisor.com

At its peak, the Federal Medical Marijuana program was said to have a total of 13 patients. Today there Survivors are 4 surviving patients for whom the government grows and supplies marijuana. The program closed to new applicants in 1992. How did Cheech and Chong miss this one?

Almost 1 in 3 no-fault auto insurance claims closed in Florida in 2007 appeared to involve the exaggeration of an injury or to be inflated by unnecessary or excessive medical treatment. Source: Insurance Research Council (IRC)

Forbe’s list of The Safest Small Cars, 2011 1. 2. 3. 4. 5. 6.

Chevrolet Cruze Ford Fiesta Hatchback Honda Civic Kia Forte Kia Soul Mitsubishi Lancer

slice

7. Nissan Cube 8. Scion tC 9. Scion xB 10. Subaru Impeza Outback 11. Toyota Corolla 12. Volkswagen GTI

TOP STORIES The most popular articles over the past six months according to online readers when visiting www.claimsadvisor.com

1. 2to 1 2. 3.

Claims Officers Driven Towards Centralization & Increased Call Center Role Survey Finds. Carriers employ close adherence to best practices for authority levels, supervisory controls and caseloads.

Source: www.forbes.com

According to a Optimists vs. Pessimists recent Gallup poll, twice as many Americans think the U.S. economy will be better than worse in 2011. Midwesterners tend to be a bit more optimistic than those living in the South or West. However, Americans are somewhat less positive about their personal economic situation. Just 44% think that things will get better personally. How about you? Is the glass half full or half empty?

Over $1 Million for CSST Case. Cozen O’Connor recently won the first U.S. jury trial involving corrugated stainless steel tubing. The attorney in the case talks about its implications.

Managing the Costliest Drugs in Workers’ Managing the Costliest Drugs in Workers’ Compensation by Maria Sciame, PharmD, CDE, RRT/PMSI. The overuse or inappropriately early use of these medications could indicate abuse or a preexisting condition that might affect the claims.

4. 60 5. 6.

National Spring Cleaning Week

Phasing Into Better Subrogation by Hobart M. Hind Jr., Esq. / Butler Pappas Weihmuller Katz Craig. Determine the costs versus the benefits before starting an expensive investigation or subrogation process.

is March 27 -April 2...Are you ready? People in the Northern Hemisphere who say that spring is percent the best time to clean things up and rid yourself of clutter.

Corps Values by Dave Pelland. The claims industry is within 10 years of losing its veteran corps. Who’s bringing up the rear?

Estimates Unveiled: Part 4 by Bradley D. Sharp, BA, AIC, RGA. Identify and contest flaws in estimates using the logical application of available facts.

CLAIMS ADVISOR | SPRING 2011

The Katie School of Insurance and Financial Services www.katieschool.org • Nationally ranked insurance program • Nearly 300 insurance majors and minors • Over 90 companies recruiting students • Excellent faculty/smaller class sizes • Scholarships/Honors program • Preparation for professional designation exams • Internships/domestic and international • Active industry involvement • Gamma Iota Sigma insurance fraternity • Highly successful career placements • Articulation agreement with Bermuda College

The Katie School attracts the best and the brightest students who are pursuing careers in the insurance and financial services industry.

To learn more about what the Katie School has to offer, contact: Deborah A. Babcock, Associate Director (309) 438-3368 Debbie.Babcock@ilstu.edu

global view

By Jeffrey T. Bowman

Making the Case for Run-Off As reserve releases tail off, voluntary exits will take over. In the wake of reduced claims frequency and investment income caused by the recent economic slowdown, insurers worldwide have been working to bolster profitability. One way they have done so is by releasing reserves, which reduces their liability and improves profits. However, analysts are warning that the reserve release boom may be over, and a trend toward adding reserves may develop soon. Another way to improve profitability that may have more staying power is voluntarily placing low-margin business into run-off. In a recent survey involving major U.S. carriers and reinsurers, 90% of the survey participants indicated that they are in the process of applying improved analytics to identify business segments, lines of business and geographic markets to exit and place into run-off. The U.K. run-off market is far more mature than that in the United States and may well have peaked earlier this decade. According to the recently released KPMG run-off survey of U.K non-life insurers, the non-life run-off market has shrunk steadily since 2003 (except during the extreme economic conditions of 2008). However, while the traditional London run-off market may be in permanent decline, “longer term business strategies adopted by some carriers suggest that a residual element of run-off will persist for many years to come,” the report says. In addition, the potential for significant run-off business exists elsewhere; the German run-off market has increased from €75 billion to €115 billion since 2007, KPMG says, and the continental European run-off business is in its infancy. That run-off business may be further bolstered by Solvency II, which will set out new, strengthened requirements for capital adequacy and risk management for insurers in European Union countries. Solvency II, which becomes effective October 31, 2012, is meant to increase policyholder protection by requiring that insurers demonstrate they have adequate financial resources to meet obligations, among other provisions. This will result in more focus on the risk and reward of business lines and should lead to increasing consideration of run-off options.

One of the critical factors to take into account in runoff scenarios is claims management. The issues around claims in run-off tend to focus on three areas: reserves, staffing and personnel management, and, most critical, claims closure. As run-off claims remain open over longer periods of time, the probability of adverse case development increases exponentially; reserves are incrementally and progressively increased, particularly if they were inadequate in the first place, which is sometimes the case with run-off books of business; and the opportunities surrounding quick and fair settlement through productive negotiations rapidly diminish.

In Europe, run-offs are most often managed in an outsourced arrangement, while in the U.S. to date, insurers tend to use internal resources. Because additional voluntary run-offs are on the horizon, we expect that U.S. insurers will turn more often to outsourcing not just to control fixed costs, but also to take advantage of the specific skills necessary to manage a run-off book of business. Run-off claims need experienced, well-paid desktop handlers in an industry that generally sees field adjusting as a higher calling. As a book of business matures, insurers and administrators are left with the more complicated files which require specific expertise to handle. And, if not incented properly, claim handlers are not necessarily inclined to close business and put themselves out of work. When fully understood and well-executed, runoff can be an effective strategy to help insurers get their financial houses in order. The key phrase here, though, is “well-executed.” Insurers and outsourcers alike need to make certain that the positive aspects of voluntary run-off aren’t cancelled out by the pitfalls that exist in managing run-off claims. Jeffrey T. Bowman is president and CEO of Crawford & Company, the world’s largest independent provider of claims management solutions with $970 million in revenues and 8,900 employees based in 63 countries. He also serves on the Executive Committee and Board of Trustees of the American Institute for CPCU/ Insurance Institute of America. He can be reached at info@us.crawco.com.

CLAIMS ADVISOR | SPRING 2011

word[s] master data

Also called reference data, master data is any information that is considered to play a key role in the core operation of a business. Master data may include data about clients and customers, employees, inventory, suppliers, analytics and more. Master data is typically shared by multiple users and groups across an organization and stored on different systems. www.webopedia.com

master data management

Abbreviated as MDM, Master Data Management, also called Reference Data Management, is a type of Information Technology (IT) that focuses on the management and interlinking of reference or master data that is shared by different systems and used by different groups within an organization. www.webopedia.com

cloud/network cloud

Also referred to as a network cloud. In telecommunications, a cloud refers to a public or semi-public space on transmission lines (such as T1 or T3) that exists between the end points of a transmission. Data that is transmitted across a WAN enters the network from one end point using a standard protocol suite such as Frame Relay and then enters the network cloud where it shares space with other data transmissions. The data emerges from the cloud—where it may be encapsulated, translated and transported in myriad ways—in the same format as when it entered the cloud. A network cloud exists because, when data is transmitted across a packet-switched network in a packet, no two packets will necessarily follow the same physical path. The unpredictable area that the data enters before it is received is the cloud. www.webopedia.com

cloud computing

A type of computing, comparable to grid computing, that relies on sharing computing resources rather than having local servers or personal devices to handle applications. The goal of cloud computing is to apply traditional supercomputing, or high-performance computing power normally used by military and research facilities, to perform tens of trillions of computations per second in consumeroriented applications such as financial portfolios, power immersive computer games, or even to deliver personalized information. To do this, cloud computing networks large groups of servers, usually those with low-cost consumer PC technology, with specialized connections to spread dataprocessing chores across them. This shared IT infrastructure contains large pools of systems that are linked together. Often, virtualization techniques are used to maximize the power of cloud computing. The standards for connecting the computer systems and the software needed to make cloud computing work are not fully defined at present time, leaving many companies to define their own cloud computing technologies. Systems offered by companies, like IBM’s “Blue Cloud” technologies for example, are based on open standards and open source software which link together computers that are used to deliver Web 2.0

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capabilities like mash-ups or mobile commerce. Cloud computing has started to obtain mass appeal in corporate data centers as it enables the data center to operate like the Internet through the process of enabling computing resources to be accessed and shared as virtual resources in a secure and scalable manner. www.webopedia.com